Euro fall continues as Greek ‘No’ vote opens up the prospect of a Grexit

Once again, last week’s currency action was mostly driven, and in the case of European currencies, almost exclusively driven, by the headlines out of Greece and the referendum there. In the end, the result was not at all close. The Greeks delivered a resounding ‘No’ to the conditions offered by their creditors, and in the process significantly strengthened Prime Minister Tsipras’ political standing in Greece. The result increases the chance of a Greek exit from the Euro, which we now estimate to be at 60%.

Greece’s permanence in the Euro now depends wholly on the European Central Bank (ECB) maintaining its lifeline to Greek banks. It can force the issue at any time by pulling out the Emergency Liquidity Assistance credit line, which would mean Greek banks could not open until a new currency is issued. Alternatively, it could keep the line capped at current levels, maintaining the impasse while (hopefully) new talks start. The drastic step of cutting off Greek banks altogether would require a two-thirds majority in the council, which we regard as unlikely; we see a significant split between the hard line German position and the more conciliatory French stand, and this split is the main hope for a new agreement. However, time is running out fast, as a modern economy cannot operate with its banks closed and every day the pressure increases for Greece to issue some sort of monetary substitute for the Euros its banks can no longer hand out.

All eyes are now on Franco-German talks today, and an emergency summit of European leaders on Tuesday.

GBP

The main news of the week was the modest upward revision of first-quarter GDP figures, to 1.6% in annualised terms. 2014 growth numbers were revised upwards as well. This confirmation of the relative strength of UK growth helped the Pound weather the storm last week, dropping a modest 1% against the Dollar while gaining a similar amount against the Euro.

EUR

Unemployment in the Eurozone continues to drop quickly, albeit from very high levels. This good news is one of the key factors driving modest strength in retail spending, which posted another small gain in May. These numbers continue to be consistent with growth of around 2%, though the financial fallout from the Greek crisis has not yet shown up in the numbers.

USD

The monthly payroll report, which usually focuses the attentions of currency traders, was overshadowed by Greek crisis headlines. 233,000 net jobs were created in June but the details were mixed. On the positive side, we saw a sharp drop in unemployment, to 5.3%, but wage growth slowed to a 2.0% annual rate, down significantly from 2.7%. Aside from the Greek crisis, we would have thought this report increases the chances of a September interest rate hike by the Fed.